Just over two years after commercial cannabis sales became legal in California, the state has collected more than $1 billion in taxes from commercial marijuana activity. Last week, the California Department of Tax and Fee Administration (CDTFA) announced that as of February 18, 2020, cannabis tax revenues have totaled $1.03 billion since retail pot sales became legal in January 2018.
The total includes $498.1 million in cannabis excise taxes, $123.4 million in cultivation taxes, and $403.1 million in state sales tax. Most of the money, after regulatory costs, has gone to fund cannabis research, public safety grants, cleaning up environmental damage from illegal pot grows, and social programs including childcare for low-income families.
The growth of California’s legal cannabis industry has been slower than expected and the state’s underground market of unlicensed pot continues to thrive. In the fourth quarter of last year, growth in the industry was up only 1.5%, down from 15.5% in earlier quarters.
“It’s an industry that was supposed to be huge, going gangbusters with the green rush,” said Zachary Pitts, the chief executive of the Ganja Goddess delivery service and the president of the California Cannabis Delivery Alliance. “It has been growing, but it’s not nearly where I think people were expecting it to be.”
High Taxes Hindering Legal Pot Market
California’s legal cannabis industry is facing tough competition from the state’s entrenched illicit market. Without the taxes, regulatory fees, and other high costs associated with a licensed operation, unlicensed pot businesses are able to undercut the legal market by as much as 80%.
The state’s levies on the industry include a 15% excise tax, a cultivation tax based on weight, and state sales tax. Cities and counties that allow cannabis businesses can also enact their own local taxes. Jerred Kiloh, the board president for the industry group the United Cannabis Business Association, said that lower taxes would help licensed companies compete with illicit operators, who are estimated to control 75% of California’s cannabis market.
“Somewhere along the supply chain, we need to lower the cost of doing business,” said Kiloh.
On January 1, however, cannabis taxes went up. In a special notice from the CDTFA in November, the state announced that cannabis cultivation taxes would be raised by more than 4%, reflecting an adjustment for inflation as required by state law.
The notice also revealed an increase in the state’s cannabis markup rate from 60% to 80%. The mark-up rate — the average difference between the wholesale cost and the retail selling price of cannabis and cannabis products — is used to determine the state excise tax on cannabis products. Regulators are required to recalculate the cannabis mark-up through an analysis of statewide market data every six months.
California legislators have introduced several bills to reduce or suspend cannabis taxes, but so far, none have been successful.